Adding Investment Advice to the Lineup

Ryan CunninghamPrincipal and Senior Consultant

Arnerich Massena

Lorianne PannozzoSenior Vice President,

Product Development and ManagementFidelity® Investments

Participant financial situations are increasingly complex

1 in 39 12

Participants can go through several job changes in their lifetime.

Average number of jobs held by the average person born between 1957 and 1964.2

do-it-yourself investors3 hasn’t engaged or made any investment or deferral changes in over two years.4

Participants can have multiple retirement accounts.

Average household reported holding an average of nine separate retirement accounts.1

71% of employees say access to help with appropriately investing their money is very important.*

COMPLEX SITUATIONS: INVESTMENT BEHAVIORS:

5is the average number of investments held by do-it-yourself investors.5

Participants are not engaged or taking action.

Participants are not diversified.

Managed accounts are gaining popularity with plan sponsors Employers are finding Managed Accounts a valuable add to their plan design.

When asked about the value proposition of workplace Managed Accounts, benefits managers….

see Managed Accounts as a way to

retain employees.6

see Managed Accountsas very important to helping employees

prepare for retirement.6

see Managed Accounts

as a way to attract the best

employees.6

57% 51% 49%

Participants are also seeing value in managed accounts

they would find the service useful.6

the concept was relevant to them.6

they would like to find out more.6

54% 52% 46%

When asked about the value proposition of workplace Managed Accounts, participants said….

We’ve seen tremendous growth in managed account adoptionOn our platform+

, over the past five years, we’ve seen an increasing number of plan sponsors and participants turning to managed accounts.

~579K enrolled

participantsNearly 4X the number of enrolled participants

from 20117

~ 4,550 clientshave adopted

managed accounts on our platform7

+This data includes both proprietary and non-proprietary managed account clients and participants acrossFidelity’s recordkeeping platform, including both Defined Contribution (DC) and Tax‐Exempt (TEM).

Managed accounts complement existing plan designMore participants are moving away from the responsibility of managing their own retirement accounts.

DO-IT-YOURSELF DO-IT-FOR-ME

CORE FUND LINEUP/INVESTMENT ADVICE, TOOLS AND RESEARCH

For participants actively engaged in managing their own retirement accounts.

TARGET DATE AND ASSET ALLOCATION FUNDS

For participants who want an asset allocation based on estimated retirement age, or that reflects a target risk profile.

MANAGED ACCOUNTS

For participants who want an asset allocation based on their individual situation, including factors such as age, time horizon, risk profile, and overall financial situation.

ELIGIBLE FOR QDIA / SMART QDIASM

51% of participants are leveraging Do-It-For-Me investing strategies.8

This number has risen from 37% just two years ago.8

Smarter plan design solutions can also help address evolving needs

Participants are evaluated on an annual basis or at a frequency determined in consultation with the plan

sponsor9

Plan sponsor sets criteria to determine each participant’s

default investment9

(e.g., age, account balance, or other indicators of financial complexity)

Some participants initially default into the

target date fund9

Some participants later default into the workplace

managed account9

Fidelity recently introduced Smart QDIA.SM Plan sponsors can evaluate and select default criteria to automatically place participants into a target-date fund or managed account.10

Potential benefits seen with managed accounts

Participants are 2X as likely to increase their deferral rates in the quarter in which they enroll in Fidelity’s workplace managed account.10

2XAmong our managed account participants who increased their deferral rates, the mean deferral rate was significantly higher.10

3.8%

1. Increased deferrals 2. More diversified

3. Stay invested

64%A majority of participants are inappropriately allocated prior to signing up for our managed account.11

11 The average number of investment options held by participants in Fidelity’s workplace managed account is 11, compared to just 5 for do-it-yourself participants.5

97% Retention rate among participants who join our workplace managed account.12

Key observations of participants who enroll in our workplace managed account

Important Additional InformationFor plan sponsor and investment professional use.

*Results from 2,000 respondents to Fidelity Investments Help and Advice Survey, April 2017. Data collection was completed by CMI Research. Fidelity Investments was not identified as the survey sponsor. CMI Research is an independent research firm not affiliated with Fidelity Investments.1 Source: Ignites Retirement Research on What Drives DC Plan-Oriented Rollovers, March 25, 2015. Ignites reported the “average” household retains nearly 2 employer-sponsored DC plans, 3 IRA accounts, and one each of a traditional DB pension and cash balance plan. Along with other retirement accounts, that’s an average of nine (9) separate retirement accounts – excluding separate savings in CDs, home equity, 529 accounts, etc.2 The average person born in the latter years of the baby boom (1957-1964) held 11.7 jobs from age 18 to age 48, according to the U.S. Bureau of Labor Statistics3 Do-It-for-Me is defined as a Target Date Fund or use of a Workplace Managed Account. And Do-It -Yourself is defined as otherwise choosing their own investments from their plan’s fund lineup.4 All information unless otherwise noted on this slide is based on Fidelity Investments record kept data of corporate defined contribution (DC) and TEM, nearly 21,900 plans and 14.2 million participants as of June 30, 2017. Excludes Non-Qualified plans, TEM Pooled plans, Defined Benefit cash balance plans, plans with 0 participants, and FMR Co. plans. Participant accounts only (excludes beneficiaries, QDROs, forfeiture, and other accounts). Client-driven exchanges do not indicate participant behavior/engagement and are NOT included. Engaged refers to participants who are actively managing their retirement account. Unengaged refers to participants who have not made a fund exchange, updated how their savings are invested, or contacted Fidelity via the phone or logged on to NetBenefits in at least two years. 5 All information unless otherwise noted on this slide is based on Fidelity Investments record kept data of corporate defined contribution (DC) and TEM, nearly 21,900 plans and 14.2 million participants as of June 30, 2017. Excludes Non-Qualified plans, TEM Pooled plans, DB cash balance plans, plans with 0 participants, and FMR Co. plans. The average number of investments held by PAS-W participants is 11.2, as opposed to 4.5 for participants who were not enrolled in a Managed Account for this time period.6 For the purposes of the survey, Managed Accounts are defined as professionally managed accounts in the workplace. Respondents included benefits managers that utilize PAS-W and other managed account providers. Gesellschaft für Konsumforschung (GFK) plan sponsor sentiment survey that polled 212 corporate benefits managers in Q1 2015 to ask about their emotional vs. rational drivers behind using professional help for their personal finances (including retirement). For the participant survey, Gesellschaft für Konsumforschung (GFK) polled 802 401(k) participants in Q1 2015 to ask about their emotional vs. rational drivers behind using professional help for their personal finances (including retirement). Respondents included participants who utilize PAS-W and other managed account providers. 7 Percentages are based on Fidelity Investments record kept data including both Defined Contribution (DC) and Tax‐Exempt (TEM) clients (and participants as of June 30, 2017. Data includes both proprietary and non-proprietary managed accounts. As of June 30, we had 4,548 clients offering managed accounts. Five years ago we saw 150,381 participants enrolled, and as of June 30, 2017 we have seen 685,984 enrolled.8 Data is based on Fidelity Investments record kept data of corporate defined contribution (DC) and TEM, from the period of January 1, 2014 to December 31, 2016. Excludes NonQual plans, TEM Pooled plans, DB cash balance plans, plans with 0 participants, and FMR Co. plans. Do-It-for-Me is defined as a Target Date Fund or use of a Workplace Managed Account. And Do-It -Yourself is defined as otherwise choosing their own investments from their plan’s fund lineup.9 Initial default could be a target date fund or other fund as determined by the plan (e.g., lifecycle fund, balanced fund, etc.), of which participants can opt out and choose a different investment option in the plan at any time. During the annual evaluation participants are provided the opportunity to opt out of the automatic enrollment into the managed account. Participants can also un-enroll from the managed account and/or choose a different investment option in the plan at any time. In the instance they choose to opt-out, they will not be included in the following year annual evaluation and passive enrollment campaign. Any participant who un-enrolls from PAS-W will automatically become ineligible for inclusion in future passive enrollment campaigns.10 Analysis includes participants who (a) enrolled in Fidelity Portfolio Advisory Service at Work (PAS-W) between January 2007 and December 2014 (b) maintained positive account balance one year before and after quarter-end of enrollment, (c) includes participants enrolled in Automatic Increase Program. N=42,316 participants. Excludes participants with prior enrollment in a Wealth Management Account on our recordkeeping platform. Excludes all non-qualified plans, all tax-exempt pooled plans and the FMR Retirement Savings Plan. Analysis counts participants whose quarter-end deferral rate increased compared to the prior quarter-end. Quarter of enrollment is the quarter in which participants enrolled in PAS-W.

Important Additional Information cont.11 Notes: (1) includes participants enrolled in Automatic Increase Program (see slide 8 for definition of Automatic Increase Program). Excludes participants with prior enrollment in a Wealth Management Account on Fidelity’s recordkeeping platform. Excludes all non-qualified plans, all tax-exempt pooled plans and the FMR Retirement Savings Plan. (2) Based on Change in Equity Allocation from Quarter-End of Enrollment vs. Prior Quarter End. Total number of participants evaluated during the timeframe = 42,316 participants. (3) Information presented is based on comparing the standard deviation of quarterly returns relative to participants that were defined as managing their own asset allocation. Do-it-yourself participants are participants who were not enrolled in a Managed Account service and did not have 100% of their account balances in a target date or Managed Account product for this time period. (4) Includes participants with funded balances in a PAS-W account from January 1, 2011, to February 28, 2015. Determination of inappropriately allocated is based on whether a participant is more than ±10 percentage points off the Fidelity equity band roll down schedule. The Fidelity equity band represents an interval of plus orminus ten percentage points around the Fidelity equity glide path, not to exceed 95% equity. Participants whose actual equity allocations fall within this age-based interval are said to be “inside“ the equity band. The Fidelity equity band is not intended as a benchmark for individual investors; rather, it represents a range of equity allocations that may be appropriate for many investors saving for retirement. “Equities” are defined as domestic equity, international equity, company stock and the equity portion of blended investment options. 12 Based on Fidelity Investments record-kept data of nearly 21,900 corporate defined contribution (DC) plans and 14.2 million participants as of June 30, 2016. Excludes Non-Qualified plans, TEM Pooled plans, Defined Benefit cash balance plans, plans with 0 participants, and FMR Co. plans. The average number of investments held by PAS-W participants is 11.2, as opposed to 4.5 for participants who were not enrolled in a managed account for this time period.

Fidelity® Portfolio Advisory Service at Work is a service of Strategic Advisers, Inc., a registered investment adviser and a Fidelity Investments company. This service provides discretionary money management for a fee.

Fidelity Brokerage Services LLC, Member NYSE, SIPC, 900 Salem Street, Smithfield, RI 02917

811293.1.0

Thomas Foster, CFADirector, Pension and Trust Investments

Pinnacle West Capital

Pinnacle West Capital Corporation Defined Contribution Structure

Tier 1 Tier 2A

Advice (Managed Accounts)Current or Other Provider

Tier 2B Tier 3

Ris

k C

ontin

uum

Aggr

essi

veC

onse

rvat

ive Asset Allocation Options

Custom Target Date

Funds5 year

Increments

Qualified Default

Investment Alternative

(QDIA)

Passive Core Options Active Core Options

US Bond Index

Stable Value

Core Plus Fixed Income

Diversified Inflation

US Large Cap

Non-US Equity

US Small/Mid Cap

US Bond Index

US Large Cap Index

Non-US Equity Index

US Small/Mid Cap Index

“White Label” Core Funds

Company Stock

Self Directed Brokerage Account

Specialty Options

Managed Accounts vs. Target-Date Funds

• There may be a mutually exclusive role for both– Target-date funds serve the QDIA role (investment default vehicle)– Managed accounts serve the needs of more involved plan participants

• Are managed accounts worth the higher fees?– That’s not necessarily a question about percentage returns vs. some benchmark– There is a qualitative value add being provided as well

• Should you try to benchmark managed account performance?– Would the age comparable target-date fund be an appropriate benchmark? – Can the record keeper’s platform accommodate customized benchmarks?

Fiduciary Duties

• A plan sponsor has a fiduciary duty to:– Act solely in the best interest of plan participants– Carry out your duties prudently

(monitor qualified vendors and document your process)– Paying only reasonable plan expenses

Fiduciary Duties and Managed Account Providers

• Document how you reached the conclusion that offering a managed account option was appropriate

– What value add did managed accounts bring to the table that justified any fee premium above the target-date fund?

– Revisit your analysis periodically– Be knowledgeable and comfortable if there is an access fee agreement between

your record keeper and your managed account provider– If your managed account provider accepts fiduciary responsibility, does that

lessen the plan sponsor’s responsibilities or does it make the plan sponsor monitoring more difficult?

Brian CosmanoVice President, Strategic Product Initiatives

Great-West Investments

Managed Accounts Performance

75%

12.5%

12.5%

Factor

Equity Allocation

Fund Selection

Sub Asset Class

Influence* Decision Maker

Participant preference/situation

Plan fiduciary

Plan fiduciary

Historical managed accounts performance is a poor measure of value

*https://corporate.morningstar.com/ib/documents/MethodologyDocuments/IBBAssociates/EqualImportanceOfAssetAllocActiveMgmt.pdf

How to Value Managed AccountsPersonalization, behavioral improvements, and financial planning drive value

Default Active Default ActiveBehavioral 20pbs 90pbs 30bps 90bps

Personalization 10bps 20bps 20bps 30bps

Contribution Rate 25pbs 25bps 25bps 25bps

Financial Planning 0bps 10bps 5bps 90bps

55bps - 145bps 80bps - 235bps Total Value

Age 35 Age 50

For illustration purposes only

A Step by Step GuidePlan fiduciaries should evaluate the value of managed accounts for their plan

1. Calculate All In Fees - Ask your managed accounts provider for sample all in fees using the funds in your lineup

2. Understand Managed Accounts Features – Understand what features are offered by your managed accounts provider and if they are automated

3. Assign a Value – Work with consultants and advisors to determine if or how much those features benefit your plan participants

4. Compare – Subtract all in fees from your value estimate and compare it to alternatives